Essays on the Linkages Between Financial Markets, and Risk Asymmetries (summary section only)

During the last few decades there have been far going financial market deregulation, technical development, advances in information technology, and standardization of legislation between countries. As a result, one can expect that financial markets have grown more interlinked. The proper understanding of the cross-market linkages has implications for investment and risk management, diversification, asset pricing, and regulation. The purpose of this research is to assess the degree of price, return, and volatility linkages between both geographic markets and asset categories within one country, Finland. Another purpose is to analyze risk asymmetries, i.e., the tendency of equity risk to be higher after negative events than after positive events of equal magnitude. The analysis is conducted both with respect to total risk (volatility), and systematic risk (beta). The thesis consists of an introductory part and four essays. The first essay studies to which extent international stock prices comove. The degree of comovements is low, indicating benefits from international diversification. The second essay examines the degree to which the Finnish market is linked to the “world market”. The total risk is divided into two parts, one relating to world factors, and one relating to domestic factors. The impact of world factors has increased over time. After 1993, when foreign investors were allowed to freely invest in Finnish assets, the risk level has been higher than previously. This was also the case during the economic recession in the beginning of the 1990’s. The third essay focuses on the stock, bond, and money markets in Finland. According to a trading model, the degree of volatility linkages should be strong. However, the results contradict this. The linkages are surprisingly weak, even negative. The stock market is the most independent, while the money market is affected by events on the two other markets. The fourth essay concentrates on volatility and beta asymmetries. Contrary to many international studies there are only few cases of risk asymmetries. When they occur, they tend to be driven by the market-wide component rather than the portfolio specific element.

Essays on Risk and Return

Perhaps the most fundamental prediction of financial theory is that the expected returns on financial assets are determined by the amount of risk contained in their payoffs. Assets with a riskier payoff pattern should provide higher expected returns than assets that are otherwise similar but provide payoffs that contain less risk. Financial theory also predicts that not all types of risks should be compensated with higher expected returns. It is well-known that the asset-specific risk can be diversified away, whereas the systematic component of risk that affects all assets remains even in large portfolios. Thus, the asset-specific risk that the investor can easily get rid of by diversification should not lead to higher expected returns, and only the shared movement of individual asset returns – the sensitivity of these assets to a set of systematic risk factors – should matter for asset pricing. It is within this framework that this thesis is situated. The first essay proposes a new systematic risk factor, hypothesized to be correlated with changes in investor risk aversion, which manages to explain a large fraction of the return variation in the cross-section of stock returns. The second and third essays investigate the pricing of asset-specific risk, uncorrelated with commonly used risk factors, in the cross-section of stock returns. The three essays mentioned above use stock market data from the U.S. The fourth essay presents a new total return stock market index for the Finnish stock market beginning from the opening of the Helsinki Stock Exchange in 1912 and ending in 1969 when other total return indices become available. Because a total return stock market index for the period prior to 1970 has not been available before, academics and stock market participants have not known the historical return that stock market investors in Finland could have achieved on their investments. The new stock market index presented in essay 4 makes it possible, for the first time, to calculate the historical average return on the Finnish stock market and to conduct further studies that require long time-series of data.

Forest governance and climate change adaptation : Case studies of four African countries

Africa is threatened by climate change. The adaptive capacity of local communities continues to be weakened by ineffective and inefficient livelihood strategies and inappropriate development interventions. One of the greatest challenges for climate change adaptation in Africa is related to the governance of natural resources used by vulnerable poor groups as assets for adaptation. Practical and good governance activities for adaptation in Africa is urgently and much needed to support adaptation actions, interventions and planning. The adaptation role of forests has not been as prominent in the international discourse and actions as their mitigation role. This study therefore focused on the forest as one of the natural resources used for adaptation. The general objective of this research was to assess the extent to which cases of current forest governance practices in four African countries Burkina Faso, The Democratic Republic of Congo (DRC), Ghana and Sudan are supportive to the adaptation of vulnerable societies and ecosystems to impacts of climate change. Qualitative and quantitative analyses from surveys, expert consultations and group discussions were used in analysing the case studies. The entire research was guided by three conceptual sets of thinking forest governance, climate change vulnerability and ecosystem services. Data for the research were collected from selected ongoing forestry activities and programmes. The study mainly dealt with forest management policies and practices that can improve the adaptation of forest ecosystems (Study I) and the adaptive capacity through the management of forest resources by vulnerable farmers (Studies II, III, IV and V). It was found that adaptation is not part of current forest policies, but, instead, policies contain elements of risk management practices, which are also relevant to the adaptation of forest ecosystems. These practices include, among others, the management of forest fires, forest genetic resources, non-timber resources and silvicultural practices. Better livelihood opportunities emerged as the priority for the farmers. These vulnerable farmers had different forms of forest management. They have a wide range of experience and practical knowledge relevant to ensure and achieve livelihood improvement alongside sustainable management and good governance of natural resources. The contributions of traded non-timber forest products to climate change adaptation appear limited for local communities, based on their distribution among the stakeholders in the market chain. Plantation (agro)forestry, if well implemented and managed by communities, has a high potential in reducing socio-ecological vulnerability by increasing the food production and restocking degraded forest lands. Integration of legal arrangements with continuous monitoring, evaluation and improvement may drive this activity to support short, medium and long term expectations related to adaptation processes. The study concludes that effective forest governance initiatives led by vulnerable poor groups represent one practical way to improve the adaptive capacities of socio-ecological systems against the impacts of climate change in Africa.

Molecular features of colorectal cancer predisposition and progression

Both inherited genetic variations and somatically acquired mutations drive cancer development. The aim of this thesis was to gain insight into the molecular mechanisms underlying colorectal cancer (CRC) predisposition and tumor progression. Whereas one-third of CRC may develop in the context of hereditary predisposition, the known highly penetrant syndromes only explain a small fraction of all cases. Genome-wide association studies have shown that ten common single nucleotide polymorphisms (SNPs) modestly predispose to CRC. Our population-based sample series of around thousand CRC cases and healthy controls was genotyped for these SNPs. Tumors of heterozygous patients were analyzed for allelic imbalance, in an attempt to reveal the role of these SNPs in somatic tumor progression. The risk allele of rs6983267 at 8q24 was favored in the tumors significantly more often than the neutral allele, indicating that this germline variant is somatically selected for. No imbalance targeting the risk allele was observed in the remaining loci, suggesting that most of the low-penetrance CRC SNPs mainly play a role in the early stages of the neoplastic process. The ten SNPs were further analyzed in 788 CRC cases, 97 of which had a family history of CRC, to evaluate their combined contribution. A significant association appeared between the overall number of risk alleles and familial CRC and these ten SNPs seem to explain around 9% of the familial clustering of CRC. Finding more CRC susceptibility alleles may facilitate individualized risk prediction and cancer prevention in the future. Microsatellite instability (MSI), resulting from defective mismatch repair function, is a hallmark of Lynch syndrome and observed in a subset of all CRCs. Our aim was to identify microsatellite frameshift mutations that inactivate tumor suppressor genes in MSI CRCs. By sequencing microsatellite repeats of underexpressed genes we found six novel MSI target genes that were frequently mutated in 100 MSI CRCs: 51% in GLYR1, 47% in ABCC5, 43% in WDTC1, 33% in ROCK1, 30% in OR51E2, and 28% in TCEB3. Immunohistochemical staining of GLYR1 revealed defective protein expression in homozygously mutated tumors, providing further support for the loss of function hypothesis. Another mutation screening effort sought to identify MSI target genes with putative oncogenic functions. Microsatellites were similarly sequenced in genes that were overexpressed and, upon mutation, predicted to avoid nonsense-mediated mRNA decay. The mitotic checkpoint kinase TTK harbored protein-elongating mutations in 59% of MSI CRCs and the mutant protein was detected in heterozygous MSI CRC cells. No checkpoint dysregulation or defective protein localization was observable however, and the biological relevance of this mutation may hence be related to other mechanisms. In conclusion, these two large-scale and unbiased efforts identified frequently mutated genes that are likely to contribute to the development of this cancer type and may be utilized in developing diagnostic and therapeutic applications.

Improving outcome of childhood bacterial meningitis by simplified treatment : Experience from Angola

Background Acute bacterial meningitis (BM) continues to be an important cause of childhood mortality and morbidity, especially in developing countries. Prognostic scales and the identification of risk factors for adverse outcome both aid in assessing disease severity. New antimicrobial agents or adjunctive treatments - except for oral glycerol - have essentially failed to improve BM prognosis. A retrospective observational analysis found paracetamol beneficial in adult bacteraemic patients, and some experts recommend slow β-lactam infusion. We examined these treatments in a prospective, double-blind, placebo-controlled clinical trial. Patients and methods A retrospective analysis included 555 children treated for BM in 2004 in the infectious disease ward of the Paediatric Hospital of Luanda, Angola. Our prospective study randomised 723 children into four groups, to receive a combination of cefotaxime infusion or boluses every 6 hours for the first 24 hours and oral paracetamol or placebo for 48 hours. The primary endpoints were 1) death or severe neurological sequelae (SeNeSe), and 2) deafness. Results In the retrospective study, the mortality of children with blood transfusion was 23% (30 of 128) vs. without blood transfusion 39% (109 of 282; p=0.004). In the prospective study, 272 (38%) of the children died. Of those 451 surviving, 68 (15%) showed SeNeSe, and 12% (45 of 374) were deaf. Whereas no difference between treatment groups was observable in primary endpoints, the early mortality in the infusion-paracetamol group was lower, with the difference (Fisher s exact test) from the other groups at 24, 48, and 72 hours being significant (p=0.041, 0.0005, and 0.005, respectively). Prognostic factors for adverse outcomes were impaired consciousness, dyspnoea, seizures, delayed presentation, and absence of electricity at home (Simple Luanda Scale, SLS); the Bayesian Luanda Scale (BLS) also included abnormally low or high blood glucose. Conclusions New studies concerning the possible beneficial effect of blood transfusion, and concerning longer treatment with cefotaxime infusion and oral paracetamol, and a study to validate our simple prognostic scales are warranted.

Precarious Pregnancies : Alcohol, drugs and the regulation of risks

Since the 1970s alcohol and drug use by pregnant women has become a target of political, professional and personal concern. The present study focuses on prenatal substance use and the regulation of risks by examining different kinds of societal responses to prenatal alcohol and drug use. The study analyses face-to-face encounters between professionals and service users at a specialised maternity clinic for pregnant women with substance abuse problems, medical and political discourses on the compulsory treatment of pregnant women as a means of FAS prevention and official recommendations on alcohol intake during pregnancy. Moreover, the study addresses the women s perspective by asking how women who have used illicit drugs during pregnancy perceive and rank the dangers linked to drug use. The study consists of five empirical sub-studies and a summary article. Sub-study I was written in collaboration with Dorte Hecksher and Sub-study IV with Riikka Perälä. Theoretically the study builds on the one hand, on the socio-cultural approach to the selection and perception of risks and on the other on governmentality studies which focus on the use of power in contemporary Western societies. The study is based on an ethnographic approach and makes use of the principles of multi-sited ethnography. The empirical sub-studies are based on three different types of qualitative data: ethnographic field notes from a maternity clinic from a period of 7 months, documentary material (medical journals, political documents, health education materials, government reports) and 3) interviews from maternity clinics with clients and members of staff. The study demonstrates that the logic of the regulation of prenatal alcohol use in Finland is characterised by the rise of the foetus , a process in which the urgency of protecting the foetus has gradually gained a more prominent role in the discourses on alcohol-related foetal damage. An increasing unwillingness to accept any kinds of risks when foetal health is at stake is manifested in the public debate on the compulsory treatment of pregnant women with alcohol problems and in the health authorities decision to advise pregnant women to refrain from alcohol use during pregnancy (Sub-studies I and II). Secondly, the study suggests that maternity care professionals have an ambivalent role in their mundane encounters with their pregnant clients: on the one hand professionals focus on the well-being of the foetus, but on the other, they need to take into account the women s needs and agency. The professionals daily encounters with their clients are thus characterised by hybridisation: the simultaneous use of technologies of domination and technologies of agency (Sub-studies III and IV). Finally, the study draws attention to the women s understanding of the risks of illicit drug during pregnancy, and shows that the women s understanding of risk differs from the bio-medical view. The study suggests that when drug-using pregnant women seek professional help they can feel that their moral worth is threatened by professionals negative attitudes which can make service-use challenging.

A risk-estimation-based formulation for speech enhancement and its relation to Wiener filtering

The goal of speech enhancement algorithms is to provide an estimate of clean speech starting from noisy observations. The often-employed cost function is the mean square error (MSE). However, the MSE can never be computed in practice. Therefore, it becomes necessary to find practical alternatives to the MSE. In image denoising problems, the cost function (also referred to as risk) is often replaced by an unbiased estimator. Motivated by this approach, we reformulate the problem of speech enhancement from the perspective of risk minimization. Some recent contributions in risk estimation have employed Stein's unbiased risk estimator (SURE) together with a parametric denoising function, which is a linear expansion of threshold/bases (LET). We show that the first-order case of SURE-LET results in a Wiener-filter type solution if the denoising function is made frequency-dependent. We also provide enhancement results obtained with both techniques and characterize the improvement by means of local as well as global SNR calculations.

Noise tolerance under risk minimization

In this paper, we explore noise-tolerant learning of classifiers. We formulate the problem as follows. We assume that there is an unobservable training set that is noise free. The actual training set given to the learning algorithm is obtained from this ideal data set by corrupting the class label of each example. The probability that the class label of an example is corrupted is a function of the feature vector of the example. This would account for most kinds of noisy data one encounters in practice. We say that a learning method is noise tolerant if the classifiers learnt with noise-free data and with noisy data, both have the same classification accuracy on the noise-free data. In this paper, we analyze the noise-tolerance properties of risk minimization (under different loss functions). We show that risk minimization under 0-1 loss function has impressive noise-tolerance properties and that under squared error loss is tolerant only to uniform noise; risk minimization under other loss functions is not noise tolerant. We conclude this paper with some discussion on the implications of these theoretical results.

Science of geoengineering

Carbon dioxide emissions from the burning of coal, oil, and gas are increasing atmospheric carbon dioxide concentrations. These increased concentrations cause additional energy to be retained in Earth's climate system, thus increasing Earth's temperature. Various methods have been proposed to prevent this temperature increase either by reflecting to space sunlight that would otherwise warm Earth or by removing carbon dioxide from the atmosphere. Such intentional alteration of planetary-scale processes has been termed geoengineering. The first category of geoengineering method, solar geoengineering (also known as solar radiation management, or SRM), raises novel global-scale governance and environmental issues. Some SRM approaches are thought to be low in cost, so the scale of SRM deployment will likely depend primarily on considerations of risk. The second category of geoengineering method, carbon dioxide removal (CDR), raises issues related primarily to scale, cost, effectiveness, and local environmental consequences. The scale of CDR deployment will likely depend primarily on cost.

Reliability-based load and resistance factor design approach for external seismic stability of reinforced soil walls

Load and resistance factor design (LRFD) approach for the design of reinforced soil walls is presented to produce designs with consistent and uniform levels of risk for the whole range of design applications. The evaluation of load and resistance factors for the reinforced soil walls based on reliability theory is presented. A first order reliability method (FORM) is used to determine appropriate ranges for the values of the load and resistance factors. Using pseudo-static limit equilibrium method, analysis is conducted to evaluate the external stability of reinforced soil walls subjected to earthquake loading. The potential failure mechanisms considered in the analysis are sliding failure, eccentricity failure of resultant force (or overturning failure) and bearing capacity failure. The proposed procedure includes the variability associated with reinforced backfill, retained backfill, foundation soil, horizontal seismic acceleration and surcharge load acting on the wall. Partial factors needed to maintain the stability against three modes of failure by targeting component reliability index of 3.0 are obtained for various values of coefficients of variation (COV) of friction angle of backfill and foundation soil, distributed dead load surcharge, cohesion of the foundation soil and horizontal seismic acceleration. A comparative study between LRFD and allowable stress design (ASD) is also presented with a design example. (C) 2014 Elsevier Ltd. All rights reserved.

Maximum likelihood analysis of multi-stress accelerated life test data of series systems with competing log-normal causes of failure

This article presents frequentist inference of accelerated life test data of series systems with independent log-normal component lifetimes. The means of the component log-lifetimes are assumed to depend on the stress variables through a linear stress translation function that can accommodate the standard stress translation functions in the literature. An expectation-maximization algorithm is developed to obtain the maximum likelihood estimates of model parameters. The maximum likelihood estimates are then further refined by bootstrap, which is also used to infer about the component and system reliability metrics at usage stresses. The developed methodology is illustrated by analyzing a real as well as a simulated dataset. A simulation study is also carried out to judge the effectiveness of the bootstrap. It is found that in this model, application of bootstrap results in significant improvement over the simple maximum likelihood estimates.

Making risk minimization tolerant to label noise

In many applications, the training data, from which one needs to learn a classifier, is corrupted with label noise. Many standard algorithms such as SVM perform poorly in the presence of label noise. In this paper we investigate the robustness of risk minimization to label noise. We prove a sufficient condition on a loss function for the risk minimization under that loss to be tolerant to uniform label noise. We show that the 0-1 loss, sigmoid loss, ramp loss and probit loss satisfy this condition though none of the standard convex loss functions satisfy it. We also prove that, by choosing a sufficiently large value of a parameter in the loss function, the sigmoid loss, ramp loss and probit loss can be made tolerant to nonuniform label noise also if we can assume the classes to be separable under noise-free data distribution. Through extensive empirical studies, we show that risk minimization under the 0-1 loss, the sigmoid loss and the ramp loss has much better robustness to label noise when compared to the SVM algorithm. (C) 2015 Elsevier B.V. All rights reserved.

Monte Carlo Valuation of natural gas investments

This paper deals with the valuation of energy assets related to natural gas. In particular, we evaluate a baseload Natural Gas Combined Cycle (NGCC) power plant and an ancillary instalation, namely a Liquefied Natural Gas (LNG) facility, in a realistic setting; specifically, these investments enjoy a long useful life but require some non-negligible time to build. Then we focus on the valuation of several investment options again in a realistic setting. These include the option to invest in the power plant when there is uncertainty concerning the initial outlay, or the option's time to maturity, or the cost of CO2 emission permits, or when there is a chance to double the plant size in the future. Our model comprises three sources of risk. We consider uncertain gas prices with regard to both the current level and the long-run equilibrium level; the current electricity price is also uncertain. They all are assumed to show mean reversion. The two-factor model for natural gas price is calibrated using data from NYMEX NG futures contracts. Also, we calibrate the one-factor model for electricity price using data from the Spanish wholesale electricity market, respectively. Then we use the estimated parameter values alongside actual physical parameters from a case study to value natural gas plants. Finally, the calibrated parameters are also used in a Monte Carlo simulation framework to evaluate several American-type options to invest in these energy assets. We accomplish this by following the least squares MC approach.

Option-Implied Preferences Adjustments and Risk-Neutral Density Forecasts

The main objective of this paper is to analyse the value of information contained in prices of options on the IBEX 35 index at the Spanish Stock Exchange Market. The forward looking information is extracted using implied risk-neutral density functions estimated by a mixture of two-lognormals and three alternative risk-adjustments: the classic power and exponential utility functions and a habit-based specification that allows for a counter-cyclical variation of risk aversion. Our results show that at four-week horizon we can reject the hypothesis that between October 1996 and March 2000 the risk-neutral densities provide accurate predictions of the distributions of future realisations of the IBEX 35 index at a four-week horizon. When forecasting through risk-adjusted densities the performance of this period is statistically improved and we no longer reject that hypothesis. All risk-adjusted densities generate similar forecasting statistics. Then, at least for a horizon of four-weeks, the actual risk adjustment does not seem to be the issue. By contrast, at the one-week horizon risk-adjusted densities do not improve the forecasting ability of the risk-neutral counterparts.

A Non-Parametric Dimension Test of the Term Structure

Published as an article in: Studies in Nonlinear Dynamics & Econometrics, 2004, vol. 8, issue 3, article 6.